Friday, December 6, 2019

Adequate Support and Record Retention

On Wednesday, we reported on a DoD-OIG (Department of Defense, Office of Inspector General) audit report that found contracting officers had not sustained the findings in DCAA audit reports based on claimed costs that were not adequately supported (see DCMA May Have Reimbursed Contractors $219 Million without Any Support for Amounts Claimed). The basis for the DCAA (Defense Contract Audit Agency) findings was FAR (Federal Acquisition Regulation) 31.201-2(d) which reads as follows:
A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable [FAR] cost principles … The contracting officer may disallow all or part of a claimed cost that is inadequately supported.
This particular provision was added to the cost principles in 1996 (FAC 90-39). The drafters commented that although the requirement, and the contracting officer's authority to disallow inadequately supported costs were considered to be implicit in the cost principles, explicit guidance was necessary because agencies were having difficulty because the FAR was silent on the issue.

FAR 4.7 contains contractor record retention requirements. It requires contractors to make available records and other supporting evidence to satisfy contract negotiation, administration and audit requirements for three years after final payment, or the period specified in FAR 4.705, whichever period expires first. So, for example, FAR 4.705-2(a) requires contractors to maintain payroll records for four years. Obviously, for most contracts, four years will lapse before the "three years after final payment" milestone. The minimum period can also be extended by contract clause. So, for example, the Allowable Cost and Payment clause at FAR 52.216-7 provides for an extension to record retention minimums when a contractor fails to meets its due date for submitting incurred cost proposals.

Contract auditors sometimes apply FAR 31.201-2(d) inappropriately. We have seen situations where this clause was cited, not because the contractor failed to retain records, but because the auditor was not satisfied with the sufficiency of the supporting data that was provided. Most of the time this involved a judgment call by the auditors because they don't want to take the time or make the effort to consider "alternative evidence" that may be available. The thing to keep in mind here however, is that if the Government invokes 31.201-2(d), it is well established that the burden is on the Government to prove that inadequately unsupported costs are unallowable.

Thursday, December 5, 2019

Allegation that Contractor Overcharged the Government by $1.3 Billion

The Justice Department announced yesterday that it was enjoining a whistleblower suit charging Navistar Defense LLC with FCA (False Claims Act) violations by submitting fraudulent invoices to support inflated prices for commercial parts under its contract to supply MRAP (mine-resistant, ambush-protected) vehicles to the Government. Although the Justice Department press release made no mention of the amount in question, other news articles have reported the fraud could be an eye-popping $1.3 Billion on contracts totaling $9 Billion.

In 2007, the Marine Corps awarded Navistar a contract to build several hundred MRAP vehicles to replace the Humvee, which proved to be vulnerable to roadside explosive devices. Navistar ultimately provided nearly 3,000 MRAPs under the contract. In 2009, as the focus of the war effort transitioned from the paved roads and flat terrain of the Iraqi deserts to Afghanistan's rocky terrain, the Marine corps sought to upgrade its MRAP vehicles with a modified Independent Suspension System (ISS). During the course of contracting negotiations for the ISS, the Marine Corps asked Navistar to provide evidence of prior commercial sales of the various parts that made up the ISS to ensure that the prices paid were fair and reasonable. The lawsuit alleges that Navistar Defense knowingly submitted fraudulent invoices that falsely purported to show prior, comparable commercial sales to conceal the inflated prices it was charging the Marine Corps. In reality, these "prior sales" never occurred.

The lawsuit was initially filed under the qui tam or whistleblower provisions of the False Claims Act by a former contracts manager for Navistar. He alleged that on more than one occasion, Navistar employees "created forged sales histories to support the inflated prices it charged the Government". Moreover, this deliberate fraud was known to and supported by Navistar's executive leadership. Navistar, it is alleged, didn't just mark these parts up a little bit. The company charged the Marine Corps double the commercial prices and double the prices it sold under other contracts.

The claims alleged in the lawsuit are allegations only. The fact that the Government enjoined the lawsuit suggests that there is substance to the allegations.

Wednesday, December 4, 2019

DCMA May Have Reimbursed Contractors $219 Million Without Any Support for Amounts Claimed

The DoD's Office of Inspector General (DoD-OIG) released a report this week that evaluated how Government contracting officers resolve audit reports issued by the Defense Contract Audit Agency (DCAA) when the Agency "Disclaims" an audit opinion. For non-auditors reading this post, a disclaimer of opinion is issued when the audit firm or audit agency is unable to perform all procedures necessary to obtain sufficient appropriate evidence to form a conclusion on whatever is being audited. In the context of incurred cost audits, this usually means that the contractor could not or would not provide the necessary supporting documentation for amounts claimed.

This OIG report (dated November 26, 2019 but not publicly released until December 2, 2019) concluded that contracting officers (namely the Defense Contract Management Agency or DCMA) may have reimbursed $219 million to DoD contractors that were not allowable costs on Government contracts.

DCAA questioned $219 million based on the contractor's failure to provide supporting documentation for claimed costs as FAR 31.201-2, Determining Allowability, requires. The DCMA contracting officer gave the money back for the following reasons:

  • The required time periods for the contractor to retain any of the records had lapsed
  • The amounts questioned in the audit report were identical to those disputed before the ASBCA (Armed Services Board of Contract Appeals) which rendered the costs allowable.
  • No action was required because DCAA had disclaimed an audit opinion.

The OIG reported that none of these reasons adequately justified the contracting officers' decision not to sustain DCAA questioned costs. First of all, regardless of the minimum record retention time periods specified in the FAR (Federal Acquisition Regulations), the contractor had an obligation to support its costs claimed on Government contracts. Second, contracting officers must take appropriate action in response to DCAA question costs, regardless of the type of audit opinion rendered.FAR 42.705 prohibits the contracting officer from resolving (or otherwise allowing) any questioned cost without obtaining adequate documentation on the costs.

Concerning the ASBCA precedent, the OIG stated that although the contracting officer stated the circumstances were identical, the contracting officer failed to include any evidence to demonstrate that the outcome of the ASBCA cases would apply to the amounts questioned by DCAA. Therefore, the contracting officer failed to adequately justify why he did not sustain the questioned costs.

As a result of this review, DCMA agreed to revisit the contracting officers' decisions to determine the allowablility of questioned costs and will take reasonable steps to recoup any unallowable costs identified during its review. In addition, DCMA will assess whether action should be take to hold the contracting officers accountable for non sustaining any DCAA questioned costs determined to be unallowable.

Tuesday, December 3, 2019

Federal Fumbles - 5th Edition

Oklahoma Senator James Lankkford has released the fifth volume in his Federal Fumbles series. These publications report on specific examples of wasteful federal spending and regulations that lead to wasteful spending.

This particular edition gives a lot of coverage to the "broken budget process" and the need to end Government shutdowns once and for all. That would be a goal that any Government contractor can endorse as Government shutdowns and the threat of shutdowns play havoc with the orderly conduct of contract performance.

Not every example in Volume 5 is related to wasteful contract spending. A lot of it relates to grants for questionable research (like $1.7 million to Russia to study the Steller seal lion in Russia or $114 thousand to study corporations that existed in Russia prior to the 1917 revolution). Some of the identified waste is not exactly spending but tax loopholes where the alcohol industry, racehorses, movies, and NASCAR have tax breaks written into the tax code. And then there's the Puerto Rican death scam where beneficiaries of social security recipients keep receiving social security payments after the recipient has died because Puerto Rico will not share death information with the Social Security Administration.

On the contracting side of wasteful spending, the report identifies a number of issues related to the Government's propensity to buy COTS (commercial off-the-shelf) items. In a number of cases COTS are lower priced but also lower quality and not equipped to do their intended jobs. The report sites one example where NSSA (National Nuclear Security Agency) purchased $5 capacitors for its nuclear weapon modernization program before finding they didn't meed quality control standards. The fix? Replacing the $5 capacitor in 370 nuclear weapons at a cost of $725 million. Also cited in the report is the Air Force expenditures related to keeping decades-old aircraft flying. Many parts are not longer in production so the Air Force needed to re-engineer those parts at significant cost.

FEMA (Federal Emergency Management Agency) gets special coverage for its "promptness over integrity" behavior. Just because FEMA is efficient in getting money out the door in the aftermath of disasters, doesn't mean that the money is being spent efficiently, effectively, or economically. This report recommends more training be given to FEMA employees on ways to detect fraud, wast, abuse, and how to reduce improper payments.

You can read this latest edition of Federal Fumbles as well as the four previous editions here.

Monday, December 2, 2019

Keeping Small Businesses "Small" for Longer Periods

There are many Government programs that accrue benefits to small businesses. One of the best, for small businesses at least, are the Federal Government's small business contracting and subcontracting goals and the contracts that are "set aside" for small businesses to help the Government achieve those goals. SBA loans are also at the top of the list of Government benefits for small businesses. SBA loans offer working capital at reasonable rates - sometimes to small businesses who might not otherwise qualify for loans.

Small businesses are determined by their size, either headcount or revenue. Those standards vary widely depending upon industry. for example, the SBA size standards for food service contractors, accounting offices, and roofing contractors are $41.5 million, $22 million, and 16.5 million respectively. Manufacturing and Wholesaling businesses tend to be stated in terms of number of employees while Construction, professional, scientific, and technical service industries tend to be stated in sales dollars.

The problem with these rigid measurements is that a company that wins one or two major contracts might suddenly be removed from SBA benefits because they "size out". Sometimes however, those peaks are only temporary and when the contract(s) end, the companies revert to their normal sizes.

Last month, two Congressmen (a Democrat and a Republican) introduced legislation designed to mitigate the effects of sudden growth, protecting small businesses from being prematurely forced out of the small business category. The bill would grant small businesses additional time to transition before competing in the open market. According to the press release accompanying this bill,
SBA's (Small Business Administration) programs are designed to support small businesses that fall below certain size standards. Once those thresholds are exceeded, businesses face new challenges such as no longer being eligible to qualify for SBA loans, contracts and other assistance, and having to compete in the open market against much larger businesses. Sudden growth in the form of receiving one or two sizable contracts results in spikes in employee count, which in turn may place a small business prematurely out of the size standard and limits their time to grow.
This new bill, entitled "Caputring All Small Business Act of 2019" provides a solution to this problem. It does so by lengthening the calculation period used to determine average employee count from the preceding 12 months to 24 months.

Friday, November 29, 2019

Accounting for "Special Facilities"

"Special Facilities" is a term commonly used to describe a process or operation that benefits only a select or limited portion of a contractor's overall operations. Special facilities might include wind tunnels, space chambers, research vessels, testing labs, etc. The name or type of facility is not important. What is important is that the cost of operating the facilities does not benefit the entire operations equally and a method is needed to allocate costs to only benefiting cost objectives. Also, the cost need to be significant otherwise its fine to find a less precise way to account for its costs.

The cost related to specialized facilities consists of direct and indirect costs. For example, indirect costs related to a research vessel might include depreciation, maintenance and repairs, supplies, and general support salaries. While it is in use however, costs tend to spike because not you have the salaries of research scientists, vessel operators, food and other sustainment costs.

There are several ways to account for the costs of the research vessel or special facilities in general. The first is to charge the readily identifiable direct costs directly to the contract and then allocate the indirect costs to benefiting cost objectives on a 'usage' basis. Using our research vessel example, if the vessel is out on the high seas for 200 days per year, the indirect costs would be allocated over those 200 days and charged to the benefiting projects. This is probably the most equitable method though challenges when trying to forecast usage.

A second method is the same as the first except that indirect costs are charged to one of the existing indirect rates, perhaps an overhead rate. This method would be open to challenges by the Government so care would be necessary to ensure that it results in an equitable distribution of costs.

A third method would accumulate both direct and indirect costs and distributed to final cost objectives through one of the contractor's appropriate categories of indirect expense. This is the least precise method and should only be used if the costs are immaterial or the indirect rate allocation base approximates the special facility's usage.

Contract auditors are always looking for ways to 'improve' cost allocations, that is, finding alternate methods of allocating indirect costs that reduce costs to the Government. Whatever method a contractor chooses to allocate special facilities costs, needs to be supported by evidence that it results in equitable allocations to final cost objectives including Government contracts.

Wednesday, November 27, 2019

New Standards for Should-Cost Reviews

Should-cost reviews are a specialized form of cost analysis. Should-cost reviews differ from traditional evaluation methods because they do not assume that a contractor's historical costs reflect efficient and economical operation. Instead, Should-cost revews evaluate the economy and efficiency of the contractor's existing work force, methods, materials, equipment, real property, operating systems, and management.

Should-cost reviews are performed by a multi-functional team of Government contracting, contract administration, pricing, audit, and engineering representatives. The objective of such reviews is to promote both short and long-range improvements in the contractor's economy and efficiency in order to reduce the cost of performance of Government contracts. Additionally, by providing rationale for any recommendations and quantifying their impact on cost, the Government is in a better position to develop realistic objectives for negotiation.

There are two types of should-cost reviews; program and overhead. Program should-cost reviews are used to evaluate significant elements of direct costs while overhead should-cost reviews are used to evaluate indirect costs, including fringe benefits, shipping and receiving, real property, and equipment depreciation, plant maintenance, security, taxes, and G&A activities.

Under FAR 15.407-4, the Government has a right to perform should-cost reviews but since they are very costly and time-consuming to carry out, such reviews are usually limited to major weapons system acquisitions. From the contractors' perspective, should-cost reviews are also costly to support and sometimes, in the contractors' view, do not offer tangible benefits to either the Government or the contractor.

Under the Fiscal Year 2018 NDAA (National Defense Authorization Act), the Defense Department was required to amend its regulations to ensure that the use of should-cost reviews were performed in a manner that is "transparent, objective, and provides for the efficiency of the systems acquisition process". This week, the Defense Department finally got around to finalizing its regulations accordingly. Under the revised regulations, DoD must consider the following:

  1. A thorough review of each contributing element of the program cost and the justification for each cost
  2. An analysis of non-valued added overhead and unnecessary reporting requirements.
  3. Benchmarking against similar DoD programs, similar commercial programs and other programs by the same contractor at the same facility.
  4. An analysis of supply chain management to encourage competition and incentive cost performance at lower tiers.
  5. A review of how to restructure the program team in a streamlined manner. The program team in this context include both Government and contractor representatives.
  6. Identification of opportunities to break out Government-furnished equipment versus prime contractor-furnished materials.
  7. Identification of items or services contracted through third parties that result in unnecessary pass-through costs.
  8. Evaluation of ability to use integrated developmental and operational testing and modeling and simulation to reduce overall costs.
  9. Identification of alternative technology and materials to reduce developmental or life-cycle costs for a program.
  10. Identification and prioritization of cost savings opportunities
  11. Establishment of measurable targets and ongoing tracking systems.

Tuesday, November 26, 2019

Contractor Retaliates Against Whistleblower

The Justice Department Office of Inspector General (OIG) investigated a complaint by a former employee of a contractor for the Federal Bureau of Prisons (BOP) that he suffered reprisal from the employer/contractor for making a protected disclosure under Federal whistleblower statutes.

Contractor employees, just like Government employees are protected against reprisal for making protected disclosures specified under 41 USC 4712(a). These protected disclosures include information that the employee reasonably believes is evidence of:

  • gross mismanagement of a Federal contract or grant
  • a gross waste of Federal funds, 
  • an abuse of authority relating to a Federal contract or grant,
  • a substantial and specific danger to the public health or safety, or
  • a violation of law, rule, or regulation related to a Federal contract or grant.
The (former) contractor employee alleged that he was harassed, subjected to retaliation, and ultimately terminated  for reporting to the BOP certain violations that he believed were not being adequately addressed by the contractor. The Justice Department press release announcing this investigation did not provide the contractor name or the alleged impropriety.

The OIG determined that the former contractor employee did indeed make a protected disclosure and that the protected disclosure was a contributing factor in the subsequent imposition of a six-month probationary period and ultimate termination. The OIG did not find clear and convincing evidence that the contractor would have either imposed the probationary period on the employee or terminated the employee in the absence of the protected disclosure. Accordingly, the OIG concluded that the employee suffered reprisal at the hands of his employer, the Government contractor.

It is now up to the Bureau of Prisons (BOP) to resolve the matter. BOP could disagree with the OIG findings which as a practical matter, won't happen. Possible remedies include any or all of the following:
  1. Order the contractor to take affirmative action to abate the reprisal
  2. Order the contractor to reinstate the person to the position that the person held before the reprisal, together with compensatory damages *including back pay), employment benefits etc.
  3. Order the contractor to pay the complainant an amount equal to the aggregate amount of all costs and expenses (including attorney's fees) that were incurred in connection with bringing the complaint.
Although details are sketchy, it sounds like the contractor engaged in disparate treatment with this whistleblower - the six-month probationary period was not something the contractor exacted on any other employee.

Monday, November 25, 2019

Specialized Experience Requirement does not Unduly Restrict Competition

The State Department issued a solicitation for a 'personal services contractor' to serve as the Justice Adviser to support the Bureau of International Narcotics and Law Enforcement Affairs (INL) in Costa Rica. The solicitation required that applicants have a law degree from an American Bar Association (ABA) accredited law school plus two years of work experience as a lawyer or judge.

The solicitation was challenged by an individual who maintained that the law degree and work experience requirements were unduly restrictive of competition. The protester's argument went something like this:

  1. There is little correlation between being a lawyer with two years of legal work experience and successful performance of the Justice Adviser requirement.
  2. The solicitation does not require the awardee to practice law or litigate cases
  3. The State Department's position that only a lawyer can perform the work with the "requisite gravitas" is illogical.
  4. A non-lawyer with "deep justice sector experience and ability" can also be successful.

The State Department had answers for all of these contentions but essentially argued that its minimum qualifications were reasonably necessary because the successful candidate should have the same credentials as the lawyers, prosecutors, and judges who the advisor will be mentoring, training, and advising. The advisor will be working directly with prosecutors and judges in case-based mentoring and acting as a subject matter expert. Further, the law degree ensures experience in the rule of law continuum, from education to professional accreditation, to practice and provide a backdrop for making recommendations and planning.

The Comptroller General handling the appeal concluded that the State Department articulated a reasonable basis for the law degree and experience requirement. A requirement for specialized experience is not unduly restrictive of competition where an agency reasonably concludes that the experience is necessary for the performance of the agency's requirements.

Friday, November 22, 2019

FedBizOps Has Been Replaced by Beta.Sam.Gov

FedBizOps has been retired and replaced by Even though it says "beta", it is currently active for contracting opportunities. Eventually, SAM (System for Award Management) will be integrated and 'beta' will be dropped out of the URL.

According to GSA (General Services Administration), the new system provides better security, data quality, and convenience, will reduce barriers for doing business with the Government, reduce reporting burden, and increase transparency into federal spending. We haven't had sufficient time to use the new system so we cannot attest to the added functionality.

GSA (General Services Administration) has posted a Quick Start guide for using the new system. This guide links to training materials and videos regarding searching and following notices posted by the Government.

Migration is straight-forward. Your login/password credentials from FedBizOps works in the new system.

Thursday, November 21, 2019

Deficiencies Identified in Audits of Subcontractors

Last March, the GAO (Government Accountability Office) issued a report soundly critical of DOE (Department of Energy) contractors' oversight of their subcontracts. GAO found that DOE did not always ensure that contractors audited their subcontractors incurred costs as required by contract terms. GAO's review of 43 incurred cost assessments and audit reports identified more that $3.4 billion in subcontract costs had not been audited and some subcontractors remained un-audited or un-assessed for more than six years (important due to the six-year statute of limitations. You can read our recap of that report which includes a link to the full GAO report here. GAO made a number of recommendations including one that would have DOE develop procedures to require its offices to step up its monitoring activities of prime contractors responsibilities to audit their subcontracts.

Last week, DOE's Office of Inspector General (OIG) issued its own report on this matter - focusing on its largest contractor, Bechtel National. Bechtel National is the prime contractor for DOE's $16.8 billion waste treatment plant that began in 2000 and is still under construction. Since inception, Bechtel has paid nearly $2 Billion in reimbursements under 400 flexibly-priced subcontracts. Bechtel's contract requires it to either conduct audits of subcontractors' costs or arrange for such an audit to be performed by the cognizant Government audit agency through the contracting officer.

You can probably guess what's coming. The OIG "determined" that Bechtel has not been fulfilling the requirement withing its contract to audit flexibly-priced subcontracts. Specifically, thee OIG found that since contract inception (2000), a significant number of flexibly-priced subcontracts have not been audited. The OIG also found that the few audits that have been performed have not always been effective or reliable. In fact, Bechtel did not even have an accurate inventory of subcontracts subject to audit. The OIG concluded that these deficiencies increased the risk of passing on unallowable costs from its subcontractors to DOE and ultimately the taxpayer.

The OIG's finding of ineffective and unreliable audits were based on findings from Bechtel's corporate internal audit staff and reviews by DOE that the audits did not comply with GAGAS (Generally Accepted Government Auditing Standards) and that there were deficiencies in performing the audits. GAGAS deficiencies included independence, auditor qualifications and continuing education, quality control and assurance, audit planning, supervisory review, and documentation of audit planning and results.

The OIG made a number of recommendations to which Bechtel concurred.

The full DOE-OIG audit report can be accessed here.

Wednesday, November 20, 2019

Financial Help for Small Businesses - Proposed Legislation

Last week, two bills were introduced in the Senate that are designed to ease financial burdens experienced by small businesses who contract with the Government. According to Senator McSally (AZ) who introduced these two bills, small businesses comprise more than 99 percent of all businesses and the U.S. economy depends upon their success. However, small business owners have been complaining about the length of time it takes to receive payment; "... they were being forced to shoulder the cost of federal work for up to a month...".

The Accelerated Payments for Small Business Act would require federal agencies contracting with small businesses to pay those businesses within 15 days, instead of the current 30-day standard. There are regulations in place already to expedite payments to small businesses and from our perspective, they are working fairly well but sometimes inconsistently. This Bill would add statutory authority to the practice and presumably, interest on late payments would begin accruing after 15 days which is not the case now.

The Small Business Payment for Performance Act would require federal agencies to make a partial payment of at least 50 percent to contractors when the project requires adjustments that differ from the original scope of work. This applies to construction contracts where, because of changes in the terms or scope of contract performance, contractors are required to submit REAs (Requests for Equitable Adjustment). This Bill, if enacted, would require the Government to prepay 50 percent of the amount of the equitable adjustment while the REA is being negotiated. Not sure that this Bill will progress too far as it represents significant exposure for the Government. Many (perhaps most) REAs are settled as less than contractors' requests. A lot of them are denied completely.

Tuesday, November 19, 2019

Contractor Pays $110 Thousand to Resolve Billing System Deficiencies

Eagle Alliance, a partnership involving Northrop Grumman, has paid $110 thousand to resolve FCA (False Claims Act) allegations that it improperly billed the Government for computer hardware. In doing so, the Company did not admit liability - the settlement only resolved some outstanding allegations.

Eagle Alliance had (has?) a contract to provide new computer hardware to NSA (National Security Agency). According to the settlement agreement, in 2012 and 2013, Eagle Alliance billed the Government twice for the same equipment. Moreover, investigations alleged that Eagle Alliance had billed the Government for used computer equipment as if they were new.

These allegations were filed by a former Eagle Alliance employee under the qui tam (whistleblower) provisions of the FCA. Those provisions permit private individuals with knowledge of fraud to sue on behalf of the Government for false claims and share in any recoveries. The former employee will receive nearly $19 thousand of the settlement.

As fraud cases go, this is a very small one and it seems to us like it was a billing issue rather than a scheme to defraud the Government. After all, no individual person benefited, it didn't go on for years and years, and what is $110 thousand to Northrop Grumman?

This case does illustrate the importance of maintaining an adequate billing system, especially for companies in the Government contracting environment. It also illustrates that fact that employees are aware of the qui tam provisions of the FCA and are constantly looking for transgressions that can yield a bit payday for themselves.

Monday, November 18, 2019

GAO Publishes Fiscal Year 2019 Bid Protest Statistics

The Competition in Contracting Act of 1984 requires that the Comptroller General (i.e. the GAO or Government Accountability Office) report to Congress each instance in which a federal agency did not fully implement one of its recommendations in connection with a bid protest decided in the prior fiscal year and each instance in which a final decision in a protest was not rendered within 100 days after the protest was files. The Act also requires a summary of the most prevalent grounds for sustaining protests during the preceding year.

The GAO just published its Fiscal Year 2019 Bid Protest Annual Report to Congress and reported that there we no instances in which a Federal agency did not fully implement one of its recommendations or in which a final decision was not rendered within 100 days. As for the most prevalent grounds for sustaining protests, the GAO reported the following:

  • Unreasonable technical evaluation
  • Inadequate documentation of the record
  • Flawed selection decision
  • Unequal treatment
  • Unreasonable cost or price evaluation

The GAO also pointed out that a significant number of protests filed do not reach the decision stage because agencies voluntarily took corrective action in response to the protest rather than defend the protest on its merits.

Overall, the number of bid protests filed in fiscal year 2019 were down 16 percent from the prior fiscal year. Correspondingly, the number of cases heard and the number of protests sustained also decreased from the prior fiscal year. Even the sustention rate wen down from 15 percent in fiscal year 2018 to 13 percent in fiscal year 2017.

The GAO report did not attempt an analysis of why the reduced number of bid protest filings. There are probably many factors affecting these percentages. Perhaps the Government is doing a better job at awarding contracts; improving its technical evaluations, improving documentation, performing reasonable cost or price evaluations, etc. In all cases, a bid protest is alleging that someone in the Government did not do an adequate job when awarding a contract. The obvious solution is to improve the source selection process by whatever means available; employment retention, training, etc.

Friday, November 15, 2019

Capital Assets as Direct Contract Costs

According to the Defense Contract Audit Agency (DCAA), auditors have found, on many occasions, contractors who have included the cost of unamortized value of capital equipment in contract cost presentations. Unfortunately, the Agency isn't any more specific as to what transpires. Perhaps a contractor has bought something specific for its Government contracts and has been depreciating the cost but finds that the asset is no longer needed so it simply charges whatever has not yet been depreciated direct to a Government contract. Ours is a little bit of conjecture but the example seems to fit DCAA's cautionary note. In any event, the Agency is directing its auditors to question the costs - the undepreciated balance of capital equipment.

Not so fast. There could be situations where charging unamortized costs direct to a contract (or contracts) is appropriate. For example, a contracting officer might have approved the accounting practice. There might be specific contractual coverage that allows the practice. The costs could be related to special tooling and test equipment that was duly approved by the Government for allocation to Government contracts.

In the case of special tooling and test equipment, the Government has already approved the purchase and contractors are required to find an allocation methodology that allocates those costs to all benefiting contracts. If a contractor allocates the cost over the anticipated production run but production is curtailed for some reason, it might be totally appropriate to charge the remaining costs to the final contract.

Thursday, November 14, 2019

$18.8 Million Settlement for Winning a Contract Under False Pretense

The U.S. sells defense articles and services to foreign countries when the President finds that to do so will strengthen the security of the U.S. and promote world peace. These are called Foreign military sales or FMS for short. FMS contracts require prime contractors to be American companies and also, requires that the American companies perform a substantial portion of the work.

ABS Development Corporation is a Delaware corporation based in New York. It is also a subsidiary of Ashtrom International, Ltd. of Israel. The Army awarded an FMS contract to ABS for renovation of the Haifa shipyard in Israel without realizing that ABS was not American owned but instead owned by an Israeli conglomerate. It fact, ABS when out of its way to hide its true ownership.

To exacerbate matters, ABS didn't perform any of the work, allowing its parent company, Ashtrom, to do it all.

When the allegation of foreign ownership surfaced, investigators from DCIS (Defense Criminal Investigative Service) and from the Army CIC (Criminal Investigation Command) initiated investigations

As a result of these investigations, ABS agreed to pay $2.8 million and forgo $16 million in potential administrative claims to settle allegations it violated the False Claims Act by fraudulently obtaining FMS contracts. ABS agreed to the $18.8 million settlement without admitting liability.

More information on this case is available through the Justice Department press release.

Wednesday, November 13, 2019

Three Guilty Pleas in Bribery Scheme

Here's a guy that both paid and accepted bribes.

Last September, John Winslett, a construction manager for an unnamed contractor performing work at Schofield Barracks (Hawaii) pleaded guilty to paying bribes totaling more than $100,000 to two Army contracting officials in exchange in order to steer more than $19 million in contracts to his company. He also pleaded guilty to accepting $723 thousand in kickbacks from a subcontractor in exchange for assigning work to that subcontractor (online source).

The two Army contracting officials got nailed as well. Last May, an Army civilian at Schofield Barracks pleaded guilty to accepting "tens of thousands" of dollars in bribes from Mr. Winslett. in exchange for sensitive internal DoD procurement information and otherwise use his position to benefit Mr. Winslett's company (online source).

Then, most recently, a third person involved in this scheme also pleased guilty to accepting more than $100 thousand in bribes from Mr. Winslett consisting of automobiles, cash, and firearms, in exchange for favorable treatment toward the contractor (online source).

Do you know what your employees are up to? How much autonomy do you give employees to carry out the purposes of your company? Is there any accountability? Is there any oversight? Too often, company representatives that are "bringing in the business" are left alone and even heralded. Later, some of them are exposed for their less than honest dealings, like Mr. Winslett was.

The Government has similar problems - employees who accept 'gifts' or even outright bribes in exchange for steering work to a certain contractor and usually, these schemes flourish because of a lack of oversight.

Tuesday, November 12, 2019

Contract Awards based on Best-Value Trade-off Criteria

When a solicitation provides for a best-value trade-off, the source selection official retains discretion to select a higher-priced, but technically higher-rated submission, if doing so is in the Government's best interest and is consistent with the solicitation's stated evaluation and source selection scheme. The source selection official has broad discretion in determining the manner and extent to which he/she will make use of technical, past performance, and cost/price evaluation results, and this judgment is governed only by the tests of rationality and consistency with the stated evaluation criteria. A protester's disagreement with an agency's determinations as to the relative merits of competing proposals, or disagreement with its judgment as to which proposal offers the best value to the agency, does not establish that the source selection decision was unreasonable.

A recent GAO decision illustrates this point. GSA issued a solicitation for janitorial services. The award was to be made on a best-value trade-off basis considering two factors, price and past performance with past performance significantly more important than price. Ultimately, an award was made to Sparkle Janitorial Services whose bid was about a percent higher than the Government estimate and whose past performance rating was excellent. Another bidder, Richen Management LLC protested the award arguing that GSA's best-value trade-off and source selection decision was unreasonable. Richen's bid was significantly less than either the Government estimate or Sparkle's winning bid by 24 percent. However, its past performance rating, which according to the solicitation's evaluation criteria was only rated at satisfactory.

Sparkle had been assigned a past performance rating of excellent based on two reference ratings of excellent and one of very good. In contrast, Richen's past performance rating of satisfactory was based on two reference ratings of satisfactory, one of very good, and one unsatisfactory. The unsatisfactory rating was based on a contract that had been terminated for cause (usually meaning failure to perform).

Richen challenged GSA's best-value trade-off analysis, arguing that GSA failed to justify its decision to select a higher-rated, higher-priced proposal as the best value to the Government. GAO however did not agree and did not sustain the protest, citing the inherent judgmental and discretionary aspects to best-value trade-off procurements. GAO noted that GSA analyzed both price and past performance, and ultimately determined that it was willing to pay a higher price for a higher-rated past performance.

The full GAO decision can be accessed here.

Monday, November 11, 2019

Nondiscrimination Rules for Spouses of Protected Veterans

Here's something else to be mindful of when the Labor Department shows up to perform compliance reviews.

The Labor Department's Office of Federal Contract Compliance Program (OFCCP) released a new directive related to the employment of military spouses, to ensure that federal contractors are not discriminating against spouses of protected veterans.

Protected veteran are those who are disabled, recently separated, active duty wartime or campaign badge, or an Armed Forces service medal veteran.

Military service usually requires multiple and frequent relocation, often creating an employment history that can add challenges to a spouse's ability to obtain and maintain employment and to achieve career goals. While discrimination safeguards for spouses of protected veterans are not new, they can be overlooked. That is why the OFCCP will require its compliance officers to inquire with federal contractors during onsite investigations about their treatment of veteran spouses.

Here are the questions that employees of federal contractors can expect during a compliance examination.

  1. Are you a spouse of a protected veteran?
  2. Do you have any coworkers who are spouses of protected veterans?
  3. Do you have any observations concerning the treatment of spouses of protected veterans?

In addition, the OFCCP's compliance officer (CO) will offer compliance assistance with drafting a written policy and ensure that the contractor understands its obligations with respect to spouses of protected veterans.

The sample compliance policy provided with the new directive reads as follows:
It is [Federal Contractor, Inc.’s] policy not to discriminate because of a person’s relationship or association with a protected veteran. This includes spouses and other family members. Also, [Federal Contractor, Inc.] will safeguard the fair and equitable treatment of protected veteran spouses and family members with regard to all employment actions and prohibit harassment of applicants and employees because of their relationship or association with a protected veteran.

Friday, November 8, 2019

Suspensions and Debarments in Fiscal Year 2018

The suspension and debarment (S&D) process is one of the tools used to protect the federal government from fraud, waste and abuse by preventing non-responsible contractors from doing business with the Government. Suspensions, proposals for debarment, and debarments are visible to the public (through SAM) as well as terminations of such actions.

Both suspension and debarment have the same effect - no more Government contracts (or subcontracts, for that matter). A debarment is considered more serious than a suspension because of its duration. A suspension is a temporary measure that doesn't usually exceed 12 months and is used pending the completion of an investigation or legal proceeding. Debarment usually lasts three years and is usually based upon a conviction.

Causes for suspension or debarment include such things as fraud, embezzlement, theft, falsification of records, false statements, violating Federal criminal laws, violation of antitrust statutes, willful, or a history of, failure to perform, knowingly failure to disclose violation or criminal law, or any other cause that affects 'responsibility'.

The Inter-agency Suspension and Debarment Committee (ISDC), among its various responsibilities, compiles annual statistics of each agency's suspension and debarment activities. The Committee just published stats for fiscal year 2018. The tally included 480 suspensions and 1,334 debarments. The Defense Department accounted for about a quarter of the suspensions about a third of the debarments - unsurprising given that significance of the Department's contracting dollars. Two agencies had no debarments or suspensions during the fiscal year; Nuclear Regulatory Commission and the Social Security Administration. Of course, this doesn't mean there were no contractors worthy of suspension and debarment, as the Committee pointed out in its report. It could mean that the contracting community was not adequately trained to utilize such tools.

The number of debarments has more than doubled since 2009 when the Committee first began tracking the numbers. The number of suspensions, on the other hand, has not changed significantly.

The full report is available here.

Thursday, November 7, 2019

Transparency and Fairness in Civil Administrative Enforcement Actions

The President issued three executive orders recently that will have some impact on Government contractors and Government contracting in general. On Tuesday, we reported on a new Executive Order (EO) rescinding a previous EO that gave incumbent employees the right of first refusal when a successor contractor takes over on a service contract (see New Executive Order Rescinds Rules on Offering Incumbent Employees Right of First Refusal). Yesterday, we reported on one designed to ensure that agencies don't circumvent the regulatory process by issuing guidance that have the effect of law or regulation (see Improving Agency Guidance Documents). Today we intend to cover the essence of the third EO entitled "Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication".

What is this all about?

The rule of law requires transparency. Regulated parties must know in advance the rules by which the Federal Government will judge their actions. The Freedom of Information Act generally prohibits an agency from adversely affecting a person with a rule or policy that is not correctly promulgated - to avoid the inherently arbitrary nature of unpublished ad hoc determinations.

The EO points out that "Unfortunately, departments and agencies in the executive branch have not always complied with these requirements. In addition, some agency practices with respect to enforcement actions and adjudications undermine the APA's (The Administrative Procedure Act) goals of promoting accountability and ensuring fairness."

Under the new EO, no person should be subjected to a civil administrative enforcement action or adjudication absent prior public notice of both the enforcing agency's jurisdiction over particular conduct and the legal standards applicable to that conduct. Moreover, the Federal Government must foster greater private-sector cooperation in enforcement, promote information sharing with the private sector, and establish predictable outcomes for private conduct.

There are a number of definitions included in the EO. One that caught our attention was "unfair surprise" meaning a lack of reasonable certainty or fair warning of what a legal standard administered by an agency requires.

There are many more requirements placed upon Executive Agencies in this EO. For example, guidance documents (discussed yesterday) cannot be used to impose new standards of conduct on persons and any agency seeking to collect information from a person about the compliance of that person must ensure that such collections of information comply with the provisions of the Paperwork Reduction Act.

The full EO can be accessed here.

Wednesday, November 6, 2019

Improving Agency Guidance Documents

Yesterday we reported on a new Executive Order (EO) rescinding a previous EO that gave incumbent employees the right of first refusal when a successor contractor takes over on a service contract (see New Executive Order Rescinds Rules on Offering Incumbent Employees Right of First Refusal). There have also been two other recent EOs that will be of interest to Government contractors. Both are aimed at reigning in executive agency regulatory powers. We will discuss one today and the other tomorrow.

Agencies adopt regulations that impose legally binding requirements on the public. The Administrative Procedure Act (APA) generally requires agencies, in exercising their responsibility, to engage in notice-and-comment rule-making to provide public notice of proposed regulations. This allows interested parties to have their concerns and comments considered prior to final regulations.

Agencies may clarify existing obligations through non-binding guidance documents, which the APA exempts from notice-and-comment requirements. Yet agencies have sometimes used this authority inappropriately in attempts to regulate the public without following the rule-making procedures of the APA. The new EO notes that even when accompanied by a disclaimer that it is non-binding, a guidance document issued by an agency may carry the implicit threat of enforcement action if the regulated public does not comply. Sometimes the public has insufficient notice of guidance documents, which are not always published in the Federal Register or distributed to all regulated parties.

Under this new EO, agencies must develop processes and procedures for issuing guidance documents. These policies and procedures must, at a minimum, (i) clearly state on each guidance, that it does not bind the public (except as authorized by law or incorporated into a contract), (ii) provide for the public to petition for withdrawal or modification, and (iii) provide for a period of public notice and comment if the guidance is considered significant. Note, the term "significant guidance is defined in the EO).

DoD contractors are probably aware of the "DOD Procedures, Guidance and Information document; 400 pages of guidance to supplement the FAR and the DOD FAR Supplement. This document would presumably be an example of the type of guidance called out under this EO.

The full EO can be accessed here.

Tuesday, November 5, 2019

New Executive Order Rescinds Rules on Offering Incumbent Employees Right of First Refusal

Last week, the President issued an Executive Order (EO) that revoked one of President Obama's first Executive Orders; Nondisplacement of Qualified Workers Under Service Contracts.

This EO is called "Improving Federal Contractor Operations by Revoking Executive Order 13495.

The now rescinded EO required that successor Federal contractors in certain circumstances offer a right of first refusal of employment to employees employed under the predecessor contract.

The new EO requires the Labor Department, the FAR Councils and heads of all executive departments and agencies to promptly move to rescind any orders, rules, regulations, guielines, programs, or policies implementing or enforcing the old EO. Also, the Labor Department must terminate, effective immediately, any investigations or compliance actions based on the old EO.

The 'right of first refusal' has been criticized by some contractors for being unnecessary. As a matter of practice, successor contractors would naturally want to hire qualified employees of the incumbent contractor. However, the rule also discouraged contractors from hiring workers that might be better suited for a particular job. Additionally, successor contractors felt compelled to offer employment to unsuitable candidates just to avoid a Labor Department investigation.  That concern was born out by some extreme Labor Department enforcement actions.

Since this EO has immediate application, it is likely that there are solicitations on the street that contain the old EO provisions and FAR provisions implementing that EO. The now rescinded rules might have an impact on what offerors are willing to bid.

Monday, November 4, 2019

Real-Time Labor Evaluations

"Real-time labor evaluations" is just a fancy name for floorchecks. Most Government contractors with cost-type contracts are intimately familiar with the term 'floorchecks'. For those not familiar with either term, they refer to unannounced visits by contract auditors to interview employees as a means of testing the validity of labor charges.

We last wrote about floorchecks (or real-time labor evaluations) in 2014 but that particular post is buried very deep in the blog archives so its time to revisit the subject - particularly when DCAA (Defense Contract Audit Agency) has increased and is increasing the number of resources dedicated to the practice area.

Real-time labor evaluations focus on four elements of timekeeping and labor distribution.

  • Evaluation of a contractors timekeeping procedures and internal controls.
  • Employee interviews which encompass a discussion of the nature of work performed and observations of the employee's workstation.
  • Analysis of employee timekeeping practices. In other words, how well do employees comply with established timekeeping procedures.
  • Reconciliation of labor charges with subsequent payroll and labor distribution reports.
Everyone of the foregoing audit objectives is important. But perhaps the most important is the existence of an adequate timekeeping system. Without that, everything else will fail because the auditor will have no assurance that labor charges to Government contracts are proper.

Many companies have moved to an online platform for tracking time charges. Some of these are more robust than others. For example, it is important to the Government that whatever 'electronic' system is used retains an audit trail and requires supervisory review and approval before charges are processed against Government contracts. These modern systems are excellent but if a contractor is not enforcing policies that require employees to record their time as least once per day, or implement procedures that prevent users from sharing login/password combinations, the system will be determined to be inadequate.

Employee interviews can stress out employees. But the auditor focus is to make certain that the work being performed corresponds to the charge number being used. There have been many documented cases where that wasn't the case.

The reconciliation step is important to ensure that the physical observations of work being performed corresponds to the charges made against the contract. If the auditor has verified that the work being performed corresponds to the charge number but subsequently, the charge number was changed, the contractor will have some explaining to do.

For more information about timekeeping and timekeeping systems, check out these previous posts:

Friday, November 1, 2019

'Help Wanted' Advertising Costs

FAR (Federal Acquisition Regulations) 31.205-34, Recruitment Costs, contains an exception to the general prohibition against advertising costs found in FAR 31.205-1. It provides that the cost of help-wanted advertising is allowable so long as the advertising

  • describes specific positions or classes of positions 
  • does not include material that is not relevant for recruitment purposes, such as extensive illustrations or descriptions of the company's products or capabilities.
So you see, while the first bullet is an objective criteria, the second one requires the exercise of judgment. And this is why contract auditors consider help wanted advertising to be a "sensitive audit area". DCAA (Defense Contract Audit Agency) has developed some guidelines to assist in determining whether help-wanted advertising is allowable. Here are some of those:
  1. Building up a backlog of resumes would be unallowable since it is not filling specific job openings. Auditors might ask to look at company responses to job applicants to determine whether the advertising is for specific job openings.
  2. Advertising which is excessive in relation to the number and importance of the positions, or in relation to the practices of the industry is unreasonable and therefore unallowable. Auditors might review the size of the add, its length and frequency, effectiveness of the advertising in terms of responses by qualified personnel and the number of hires.
  3. Help wanted advertising should be limited to the following. Anything more should be reviewed further.
    • Position description
    • Description of the compensation and fringe benefits
    • Qualifications of the applicant
    • Opportunities for advance
    • Brief description of the company and its work
    • Conservative illustrations that do not evidence promotion of the sale of products or fostering its image
    • Name of the company, conservatively presented in relationi to the other information in the advertising.
Auditors are also instructed to review any corollary help-wanted advertising costs that might include the cost of photographs, art and design work, and radio and television tapes.The same criteria apply regardless of whether the work was outsourced or performed in-house.

Thursday, October 31, 2019

Regulatory Reform Task Force

Back in 2017, the President signed an Executive Order (EO) requiring, among other things, each Federal agency to establish a Regulatory Reform Task Force. One of the duties of these task forces is to evaluate existing regulations and make recommendations to their agency heads regarding repeal, replacement, or modification. Specifically, these task forces were to focus on regulations that (i) eliminate jobs or inhibit job creation, (ii) are outdated, unnecessary, or ineffective, (iii) impose costs that exceed benefits (iv) create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies, or (v) derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified.

So how is everyone doing?

OMB's (Office of Management and Budget) Office of Information and Regulatory Affairs, recently published a summary of regulatory reform results for Fiscal Year 2019. Here's their report card:

  • Agencies eliminated $23 billion in overall regulatory costs across the Government
  • Deregulations outpaced new regulations by a ratio of 12:1. There were a total of 176 deregulation actions compared to 14 new significant regulatory actions

How does that $23 billion in savings break down by Agency. For the full breakout, see Final Accounting for Fiscal Year 2018. Half of the savings are attributable to Health and Human Services. The Defense Department saved a paltry $67.9 million with four deregulatory actions (about 0.3 percent of the total).

What about the FAR (Federal Acquisition Regulations)? The FAR Councils implemented two deregulatory actions with estimated savings of $0.

For the current fiscal year, the Office of Information and Regulatory Affairs estimate an additional $18 billion in savings from final rulemaking.

Read more about activities of the Regulatory Reform Task Forces here.

Wednesday, October 30, 2019

Insurance - Professional Liability

We've been working our way through various types of insurances to see what FAR (Federal Acquisition Regulations) has to say about the allowability of their costs and also to highlight, where we can, the audit procedures that contract auditors might employ to assess the reasonableness and propriety of such costs.

We began early this year with War Hazard Insurance, a type of insurance coverage that most Government contractors don't need (see War Hazard Premium Payments). We wrote a couple of posts on "self-insurance" because this is an area with potential 'cost' issues (see FAR Provisions Covering Self-Insurance and  Self-Insurance Plans - What Contract Auditors Will Look For). Next, we asked the question of whether it is necessary to insure Government property in contractors' possession (see Should You Insure Government Property in Your Possession). And last week we discussed the need for product liability insurance (see Insurance - Product Liability Insurance). Today we will look at Professional Liability insurance.

The cost or professional liability insurance is allowable, subject, of course, to tests of reasonableness and allocability. The allocability test is where some contractors run afoul of Government oversight.

If a professional liability insurance policy provides coverage for its general practice, allocation of premiums to all contracts through overhead or G&A (general and administrative) expense is usually acceptable. However, if the policy is written to provide unique liability coverage for a particular business segment or product, costs should be directly allocated to the benefiting cost objective.

Consider Boeing. Boeing builds airplanes for commercial customers and for the Government. It is safe to assume that the company's its potential liabilities for commercial customers is much greater than that for its Government customers. One only needs to consider the on-going 737-Max saga to realize that is true.

Where a plain reading of the policy does not clearly establish the general nature of the coverage or the contract auditor has reason to believe that unique liability coverage is involved, the Government will examine the types of services being rendered to both the Government and commercial customers. If the services are essentially similar, a broad-based allocation is acceptable. On the other hand, where the services are dissimilar, examination should be made of the claims and loss experience.

In determining premiums for a contractor, the insurance carrier usually considers such factors as location of the business, size of the firm, professional discipline being practices, and loss experience. The proper allocation of premium costs should be determined primarily by the terms of the coverage. If the coverage between commercial and Government is similar, a broad based allocation method is probably appropriate.

Tuesday, October 29, 2019

Contractor Settles Overpayment Allegations for (an additional) $6.4 Million

The Air Force awarded CH2M Hill Inc two A&E (Architectural and Engineering) contracts to support construction efforts at multiple Air Force installations across the continental United States. These were T&M (Time and Material) contracts where labor costs are billed as work progresses at pre-determined billing rates. As is the nature of T&M contracts, individuals billed for various labor categories must meet minimum educational and/or experience requirements for the position being billed.

In 2014, DCAA (Defense Contract Audit Agency) conducted an audit of CH2M Hill's 2008 billings on these contracts and found that at least eight engineering employees did not meet labor qualification requirements. That prompted CH2M Hill to conduct its own internal audit where they discovered the problem was much more significant than just eight employees. Internal audit discovered more than 300 instances of unqualified labor billed against the two contracts.

In 2015, CH2M Hill notified the Defense Department through a mandatory contractor disclosure program that an external review of its billing system identified weaknesses in validating their employee's qualification requirements when billing the Air Force for work performed. An investigation ensued and ultimately, CH2M Hill voluntarily repaid $10.5 million (of which $2.2 represented interest) to the Air Force.

That wasn't the end of the story. The Justice Department kept the case open because CH2M Hill failed to notify the Government of the billing issue when it first became aware of them.

The issue was finally settled last week when CH2M Hill agreed to pay an additional $6.4 million to settle the issue once and for all. According to the Justice Department press release, CH2M Hill knew of the overpayment as early as 2011, but attempted to keep the information secret by claiming that an audit of its labor practices was privileged information. That argument didn't hold up well. While CH2M Hill did not admit to any wrongdoing , it did agree to pay the additional $6.4 million to resolve all Government claims.

Contractors are reminded that they have a contractual obligation to timely disclose to the Government in connection with the award, performance, or closeout of a Government contract or subcontract, credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations or violations of the False Claims Act and remit any significant overpayment amount.

Monday, October 28, 2019

Prompt Payment Interest Rate Drops by One Percent

Do you remember the early 1980s when prompt payment interest rates peaked at over 15 percent? A decade later, interest rates dropped to less than half that and a decade after that, dropped to less than half again. In the last few years, interest rates have been hovering around two to three percent. The all-time low was 1.375 percent in 2013.

The Treasury Department just announced the prompt payment interest rate (also used for the Contract Disputes Act) for the second half of this year. It has dropped a whole percentage point from 3.625 percent for the first half of 2019 to 2.625 percent for the second half.

This rate is used to calculate interest due contractors when payment is made late - usually after 30 days from receipt of "acceptable" billing documents. Most of the time, the Government calculates and pays this penalty regardless of whether the business concern has requested payment of such penalty. It is calculated from the day after the required payment is due until the date that payment is made.

The Prompt Payment Act was enacted in 1982 at a time when interest rates were high (greater than 15 percent) and the Government did not seem to regularly meet its 30 day goal for making payments. Contractors who had to borrow for working capital couldn't afford to "finance the Government" as well - a lot of them watched their anticipated profits wither away. Over the ensuing years, Government "paying offices" (like DFAS) have improved their systems so that late payments are relatively rare. Still, the 'Act' remains and because of it, contractors can count on prompt payments for cash flow purposes.

Friday, October 25, 2019

$300 Thousand Wasted on Useless Training

Do you think training is important? Do you think continuing education is important? Is there real value in remedial training?

The Government thinks so. Read any report by GAO (Government Accountability Office) covering the effectiveness, efficiency, or economy of a program, service, or contract and invariably, it will include a recommendation for more training. Same goes to reports by various OIG (Office of Inspector General) organizations. Even DCAA (Defense Contract Audit Agency) recommends more training whenever they find internal controls deficiencies in one of the few business systems the organization audits these days.

As if more training is going to solve whatever problems have been identified. Here's some examples:

  • Contractor employees didn't fill out their timecards properly or on time - they need more training.
  • An interviewer said something naughty during an employment interview - the entire organization needs more training.
  • Congress passed a law prohibiting retaliation against whistleblowers - train everyone on how not to retaliate against whistleblowers.
  • A contracting officer didn't check all the boxes she was supposed to check prior to awarding a contract - the entire organization needs more training.

Recommendations for more training are lazy recommendations. The auditor or evaluator doesn't need to drill down to root causes why something didn't happen the way it should have or the way the process was designed. Why don't employees fill out their timecards correctly? Is it from lack of training? Probably not. It doesn't take any particular skill to fill out a timecard. There must be some other reason.

One of the problems that organizations have when trying to solve a problem with more training is that they come up with a half-baked training plan, throw it at the people. The organization is happy because they can now check a box saying they've complied with a recommendation. And the trainers are happy because they collect their money.

A recent article published by POGO (Project on Government Oversight) illustrates the problem when the training is motivated by an arbitrary timeline rather than a well thought out curriculum.

The VA (Department of Veterans Affairs) opened an accountability office to change the Agency's culture of retaliation against whistleblowers, The article is interesting in that it points to a lot of mismanagement in the organization. But the salient point to this article is that the number two guy in the organization demanded that its staff be trained by a certain date so that the number one guy, scheduled for Congressional testimony one month later, could state honestly that everyone had been trained.

What transpired after that was a sole-source contract for the training that was ultimately cobbled together from other sources including VA materials, much of it that wasn't even on subject-matter, conducted by individuals who obviously didn't know the materials even though they were subject-matter experts who read from scripts.
There wasn't anything in the training that was remotely relevant or useful. one attendee reported. It was like nothing I've ever seen, and I've been in Government for 20 years, another reported.
At one point, attendees had to correct instructors who didn't know the legal definition of a whistleblower had changed in 2017.
You could feel the hostility in the room, an attendee recounted, as the instructors struggled to exert control over the training and respond to questions from increasingly frustrated attendees.
Whenever we see or hear of recommendations that more training is needed to solve a problem, we just roll our eyes and read on to see if the report includes other recommendations to show the auditor/evaluator even understood the root cause and had precise or specific solutions to correct whatever deficiency had been cited.

You can read the full POGO article here.

Thursday, October 24, 2019

Insurance - Product Liability Insurance

In the normal course of doing business, contractors will want to insure themselves against bodily injury to others, and damage to, or loss of, property of others arising from the failure of its products.

Costs of such insurance is generally allowable. However, the Government believes that risks are often lower for military products than they are for commercial products.

With that in mind, contract auditors like DCAA (Defense Contract Audit Agency) will look into the possibility that whatever method a contractor is using to allocate product liability insurance costs may be inequitable to the Government.

A common base for allocating such premiums is sales but sales may not achieve an equitable result or allocation of costs to Government contracts.

Auditors are instructed to ascertain that contractors have "conscientiously" attempted to negotiate with its insurance carriers separate military (or Government) product rates commensurate with the loss experience of such products. If that hasn't occurred, auditors are to obtain the view of the contracting officer and proceed accordingly. Also, auditors are instructed to ensure that there is no absorption by Government contracts of premiums solely applicable to a contractor's commercial products.

Auditors will analyze Government and commercial loss experience for a representative period. Any allocation that exceeds loss experience may be unreasonable and therefore questionable. At this point, the auditor might delve in further by

  • requesting detailed explanations from the insurance carriers on the basis of the premium split between commercial and Government and a breakdown of risk exposure. Note here, the audit will go directly to the insurance carrier and not necessarily rely on the contractor to provide the information.
  • if possible, compare premiums and allocation bases with comparable companies.
  • if possible, obtain independent quotes from insurance carriers on Government exposure only.
We've never seen the last two bullets followed. In the first case, finding comparable companies is not possible. There are always vagaries in the risk assessment that are unique to specific companies. In the later case, preparing a quote requires extensive fact finding and analysis. No insurance company is going to do this work without the possibility of writing a policy.

Wednesday, October 23, 2019

Expressly Unallowable Costs - Raytheon Court of Appeals Decision Broadens the Definition

The U.S. Court of Appeals for the Federal Circuit just upheld Raytheon's appealed a decision by the ASBCA (Armed Services Board of Contract Appeals) that unallowable salary costs associated with Raytheon's lobbying activities were 'expressly unallowable' under FAR 31.205-22 and thus subject to penalty under FAR 42.709-1(a)(1) (known as level 1 penalties).

Raytheon submitted its 2004 incurred cost proposal in 2005. DCAA (Defense Contract Audit Agency) completed its audit in 2006 and found, among other things, over $220 thousand of expressly unallowable lobbying salary costs. In 2011, DCMA (Defense Contract Management Agency) demanded that Raytheon repay the Government for these costs and additionally, assessed a penalty and interest under FAR 42.709-1(a)(1).

Raytheon appealed to the ASBCA and lost on this issue. Its argument was that salary costs associated with lobbying activities were not specifically referenced in FAR 31.205-22 and accordingly, were not "expressly unallowable". The ASBCA upheld the DCMA decision, finding that lobbying costs are subject to penalty because "costs associated with certain named lobbying activities are stated to be unallowable under FAR 31.205-22" and "they are ... expressly unallowable. (That Decision can be accessed here). The ASBCA also noted that FAR 31.201-9(a) and (e)(2) makes salary costs of employees who participate in unallowable activities are also expressly unallowable as directly associated costs of that activity.

Raytheon then appealed the ASBCA decision to the Court of Appeals. Raytheon argued that salary costs of employees who participate in lobbying activities are not expressly unallowable under a cost principle in FAR. Raytheon contended that an item of cost must be mentioned or identified by name to be expressly unallowable and that the generic language of costs associated with lobbying activities is insufficient. The Court of Appeals found no basis for such an interpretation and explains, in detail, why it came to that conclusion (The full Court of Appeals decision can be accessed here).

Perhaps a fallout of this decision will be that the Government may renew its aggressiveness on calling out costs as expressly unallowable and subject to penalties. The penultimate paragraph of the decision reads:
Finally, Raytheon relies on a decision in a prior proceeding where the Board held that neither bonus and incentive compensation costs nor compensation cost is specifically named and stated as unallowable under the cost principle (in FAR 31.205-22), nor are such costs identified as unallowable in any direct or unmistakable terms. That decision is not binding on this court, and in any event, is contrary to the plain language of Subsection 22 to the extent that it concludes that salaries in the form of bonus and incentive compensation for lobbying and political activities are not "expressly unallowable".
After the decision ASBCA decision referenced here, DCAA ratcheted back its guidance on what constitutes expressly unallowable costs. Perhaps we will soon see that guidance amended again.

Tuesday, October 22, 2019

New Guidance on Anti-Trafficking Regulations

FAR (Federal Acquisition Regulations) 22.17 requires Government contractors to work proactively to prevent human trafficking in their supply chains and take remedial steps if such activities are identified. The term 'human trafficking' encompasses many things but in the context of Government contracting, refers primarily to child labor and forced labor. The requirement applies to contracts greater than $500 thousand.

The Office of Management and Budget (OMB) released guidance yesterday to help contractors manage and reduce the burden of meeting their responsibilities. It describes anti-trafficking risk management best practices and mitigation considerations that acquisition officials can take into account when working with contractors to address their obligations.

The new OMB guidance:

  • Reviews key responsibilities of the regulations
  • Highlights best practices that have been shown to contribute to effective deterrence
  • Describes mitigation actions that should be given appropriate consideration by contracting officers in evaluating the suitability of steps taken by a contractor that has reported a trafficking incident and
  • Provides a FAQ section
The FAR regulations (and the underlying statute) contain express prohibitions on certain types of trafficking related activities. These include prohibition on charging employees recruitment fees, and destroying, concealing, confiscating or otherwise denying access to identity or immigration documents. The regulations also require contractors to implement risk management practices such as an employee awareness program, a recruitment and wage plan, and a housing plan. FAR also requires contractors to take appropriate action against employees, agents, or subcontractors that violate prohibitions. Additionally, contractors now have an affirmative duty to report violations to the OIG (Office of Inspector General).

While this new guidance is primarily aimed at contracting officers, the section on best practices contains a good bit of advice on what a contracting officer might consider when assessing contractors' compliance with the anti-trafficking regulations.

Monday, October 21, 2019

Legislation Proposed to Repeal the Davis-Bacon Act (DBA)

Senator Mike Lee (Utah) has introduced (or should we say 're-introduced') legislation last week to repeal the Davis-Bacon Act. Six other Senator's signed on as co-sponsors of the proposed repeal.

The Davis-Bacon Act is a wage subsidy law requiring all federally-funded projects (greater than $2,000) to pay workers the "prevailing wage" rate on non-federal projects in the same locality. The problem with the prevailing wage law is, as everyone knows and understands or at least suspects, that the prevailing wage schedules coming out of the Labor Department, are significantly higher than the real prevailing wages. To illustrate with an anecdote, a plumber working for $33 per hour on new residential construction, was temporarily deployed by his employer to a project at a local military installation where he earned more than $40 per hour. After the military job was completed, he returned to his previous job site and began working again at $33 per hour.

According to Senator Lee's press release announcing the legislation,
The Davis Bacon Act exemplifies how big government hurts the people it purports to help, gives unfair advantages to favored special interests (e.g. unions), and squeezes the middle class. The Davis-Bacon Repeal Act would remove these government-imposed obstacles to economic opportunity facing low-skilled workers, and return wasted taxpayer dollars back into the hands of the American people.
There is no doubt that Federally funded construction projects would cost less without the prevailing wage law. However, we don't expect the proposal to get very far in Congress. Also, the Labor Department's Wage and Hour Division (WHD) would lose half its case load.

Read more about the proposal here.

Friday, October 18, 2019

Should You Insure Government Property in Your Possession?

Continuing on with our discussion of insurance costs and the allowability of such, we move now form our discussion of self-insurance to a few other types of insurance that have conditions upon whether associated costs are allowable.

Many Government contractors have Government property in their possessions for various reasons - usually temporary. The question often arises over whether the risks of loss of Government property should be insured and then if insured, whether the costs are allowable. FAR 31.205-19(e)(2)(iv) answers that question. FAR states that the cost of insurance for the risk of loss, damage, destruction, or theft to Government property are allowable only when three conditions are met:

  1. the contractor is liable for such loss, damage, destruction or theft
  2. the contracting officer has not revoked the Government's assumption of risk (in accordance with FAR 45.104(b). The contracting officer can revoke the Government's assumption of risk when the property administrator determines that the contractor's property management practices are noncompliant with contract requirements, and
  3. such insurance does not cover loss, damage or destruction which results form willful misconduct or lack of good faith on the part of any of the contractor's management personnel. Contractor's managerial personnel are defined in FAR 52.245-1(a) as directors, officers, managers, superintendents, or equivalent representatives who have supervision or direction of the company's business, plant, or separate location.

DFARS (Defense FAR Supplement) adds one other consideration to the allowability question. DFARS 231.205-19(e)(7) states that in addition to the FAR limitations listed above, the allowability of insurance costs are also subject to other limitations. These limitations are listed in DFARS 252.217-7012 and essentially related to contractor negligence.

The key to ensuring the allowability of insurance costs related to Government property is to maintain close coordination with your contracting officer as to what is insurable and to make sure your internal controls over Government property in your possession are adequate.

Thursday, October 17, 2019

Motions for Reconsideration of Previous Decisions

A 'motion for reconsideration' asks the judge to reconsider his/her decision in light of other facts, circumstances, or law that wasn't brought up in the original hearing on the matter.

In the context ASBCA (Armed Services Board of Contract Appeals) decisions, Rule 20 allows such motions to be filed by either party and must set forth specifically the grounds relied upon to grant the motion. Motions must be filed within 30 days of receiving the Board's decision. Opposing parties have 30 days after a motion has been filed to file any cross-motion for reconsideration. Extensions to these times are not granted.

It is well established that motions for reconsideration are not granted lightly. In order to prevail on a motion for reconsideration, a contractor or the Government must demonstrate a compelling reason for the Board to modify its original decision. There are three bases upon which the ASBCA will reconsider a previous decision:

  • Newly discovered evidence
  • Mistakes in finding of fact
  • Errors of law.

Motions for reconsideration are not intended to provide either party, the contractor or the Government, with another chance to again argue its position that was previously raised and denied. In some decisions where motions for reconsideration have been heard, the ASBCA is highly critical of parties that try to do just that - rehash the same arguments.

The probability of success in filing motions for reconsideration are slim. A brief scan of ASBCA decisions involving motions for reconsideration during the last couple of years found none that were not denied. There was one case where the Government argued that an opinion included factual errors as well as legal errors that stemmed from the factual errors. The ASBCA agreed that its decision included one factual error but it viewed the error as immaterial in the circumstances so denied the motion for reconsideration.

Wednesday, October 16, 2019

Self-Insurance Plans - What Contract Auditors Will Look For

When submitting request for self-insurance plans to the contracting officer, contractors are required to provide, among a long list of other documents, self-insurance feasibility studies or insurance market surveys reporting comparative alternatives, loss history, premiums history, and industry ratios. The point of this is to insure that the costs of self-insurance does not exceed the cost of purchased insurance. Excess self-insurance costs exceeding the cost of comparable purchased insurance is unallowable under FAR 31.205-19(c)(3):
If purchased insurance is available, any self-insurance charge plus insurance administration expenses in excess of the cost of comparable purchased insurance plus associated insurance administration expenses is unallowable.
DCMA (Defense Contract Management Agency) has the responsibility under FAR 42.3 for reviewing contractors' insurance coverage. Those reviews are usually limited to verifying that the contractors' insurance program provides appropriate protection in consonance with the types of risks involved. Such reviews, by themselves, do not constitute a sufficient basis for accepting related costs. That's where DCAA (Defense Contract Audit Agency) or other independent contract auditors come in.

When reviewing a contractor's self-insurance program, contract auditors will consider whether the contractor has performed regular (and recent) comparative cost analysis of the self-insurance program with comparable purchased insurance costs. While the contracting officer may have initially approved a contractor's self-insurance plan, after time, the comparative analysis initially submitted may no longer be relevant. And here's where some contractor's have run afoul of the audit process - they have no evidence to show that its self-insurance plan(s) remain cost effective. That is, the costs plus administration expenses for self-insurance, do not exceed the costs of comparable purchased insurance.

Contract auditors will review other aspects of self-insurance plans as well, such as;

  • The types of risks covered and the nature of contractors' risk assumptions
  • Effectiveness of the claims procedures. For example, are there procedures in place to ensure that payments are made only to valid participants? Children eventually age out and should be removed from participation. In the case of divorce, the spouse should be removed from participation.
  • Equity of the accounting treatment of self-insurance costs including how the costs are allocated to final cost objectives.
  • Maintenance of the reserve in accordance with CAS 416 (if applicable).
Self-insurance can save contractors a lot of money. But self-insurance plans must be closely monitored to ensure that the costs meet the requirements of FAR 31.205-19 and that claims are not paid out to ineligible participants or for events that are not covered by insurance.

Tuesday, October 15, 2019

FAR Provisions Covering Self-Insurance

Many Government contractors have elected to provide coverage for certain risks from their own resources under a program of self-insurance. A decision to self-insure is typically based on a determination that coverage can be provided by self-insurance at a cost not greater than the cost of obtaining equivalent coverage from an insurance company, or in the case of workers compensation, a State fund. That makes some sense. With self-insurance, a contractor is not paying for the insurance company's profits. The larger the company, the more cost effective it is to be self insured since there is a much larger workforce to spread the risks.

Even with self-insurance programs, contractors will carry or maintain various forms of purchased insurance to cover major risks and catastrophic losses. For example, under a self-insured health plan, contractors will usually limit its self-insurance to routine hospital, surgical, and medical expenses and, at the same time, purchase insurance covering life, accidental death and dismemberment, disability income benefits and dreaded disease coverage.

Accounting for self-insurance programs requires a level of precision that is not so easy to estimate. Under a self-insurance program, a contractor must make a charge for each period (i.e. monthly). This charge must represent the projected average loss for that period. How does one project an average loss for a period? Obviously contractor's need good historical data and a sense of what might happen in the future.

Self-insurance charges plus insurance administration expenses may be equal to, but cannot exceed the cost of comparable purchased insurance (see FAR 31.205-19(c)(3)). This is where some contractors run afoul of contract auditors because they don't know, or haven't determined the cost of purchased insurance.

FAR 28.308 requires contractors to submit self-insurance programs to the contracting officer for approval when 50 percent or more of the self-insurance costs to be incurred at a segment will be allocated to negotiated Government contracts and are expected to exceed $200 thousand per year. That same FAR provision includes a list of what is required in the submission for contracting officer approval.

Tomorrow we will look at some of the things a contract auditor might review when it comes to self-insurance costs.

Monday, October 14, 2019

Contractor Pays Nearly $1 Million in Back Wages for Labor Law Violations

A division of the Labor Department, this time the Wage and Hour Division (WHD), announced the results of its investigation of General Atomics for compliance with Federal labor laws. The company, a California-based contractor providing aircraft systems and services to the Army, agreed to pay nearly $1 million to 1,100 employees for violating the Service Contracting Act (SCA).

According to the Labor Department, General Atomics failed to pay prevailing wages and required health and welfare benefits to employees performing services under several Government contracts. General Atomics paid aircraft mechanics and engineering technicians at hourly rates below the SCA minimums and also failed to pay minimum fringe benefits required by the SCA.

In making the announcement, the Labor Department reminded employers doing business with the Federal Government that they need to understand and abide by all applicable laws and to ensure that employees receive legally required pay and benefits. Easy to say but difficult to implement, we suppose.

Friday, October 11, 2019

Improper Business Practices - Contingent Fees

This is the fifth installment in our periodic series on improper business practices under FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, buying-in and antitrust matters. It also offers whistleblower protections to contractor employees, requires contractors to establish and implement codes of business ethics and conduct, and more.

In Part 1, we discussed the requirement for contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. In Part 2, we discussed the practice of "buying in" and tools for contracting officers to use to prevent subsequent cost growth when contractors do buy in. In Part 3, we discussed the prohibition against offering gratuities to Government personnel, a prohibitions that should be rather obvious to everyone. In Part 4 we alerted you to practices that might be reportable as violations of antitrust laws and contracting officers affirmative duty to report "suspected" violations of anti-trust  laws. Today we will be discussing the prohibitions against contingent fees.

What are contingent fees? Contingent fees are broadly defined in FAR as any commission, percentage, brokerage, or other fee that is contingent upon the success that a person or concern has in securing a Government contract. Contractors' arrangements to pay contingent fees for soliciting or obtaining Government contracts have long been considered contrary to public policy because such arrangements may lead to attempted or actual exercise of improper influence. Contractors are required to certify in each negotiated procurement that they have not paid any contingent fees.

There is one limited exception to the payment of contingent fees. Contingent fee arrangements between contractors and their bona fide employees are permissible.

 Like other violations of described in this series, contracting officers have an affirmative duty to report suspected violations of this prohibition. Misrepresentations or violations can lead to one or more of the following:

  • If before award, a bid will be rejected.
  • If after award, the Government can annul the contract or recover the fee.
  • Additionally, the Government can suspend or debar the contractor from future contracts.
  • Refer suspected fraudulent or criminal matters to the Justice Department.